The role infrastructure assets can play in your portfolio
Large institutions have access to real estate and infrastructure assets that individual investors don't, yet there are ways to get similar exposure using listed companies.
Mentioned: Vanguard Global Infrastructure ETF (VBLD), Auckland International Airport Ltd (AIA), Brookfield Infrastructure Partners LP (BIP), Magellan Infrastructure Ccy Hdg ETF (MICH), Transurban Group (TCL)
Dave Swensen may be the most influential investor who remains off the radar of the average investor. The former head of Yale University’s endowment passed away 2021 after revolutionising the way we think about investing.
Over his career at Yale the endowment grew from $1.6 billion USD to more than $31 billion at the time of his death.
His contribution to the investing field heavily influenced the way that millions of Australians invest for retirement as industry Super funds have followed his lead in the way they allocate their portfolios.
When Dave Swensen took over at Yale the approach to endowment investing resembled the approach that many individual investors took with their own portfolios. A 60/40 mix between shares and bonds was employed.
Swensen was a firm believer in diversification and started looking at ways to expand beyond the traditional share and bond investments. He turned his attention to what is known as alternative investments.
Both traditional companies and real assets have a place in your portfolio. Picture: AP
Swensen moved much of the endowment portfolio into absolute return strategies that were designed to perform in any market environment and private investments in real assets including real estate and infrastructure.
Success often breeds imitation and soon other investors with similar goals were following in Yale’s footsteps.
We can see this impact in Australia with the portfolios of large industry Super funds. For instance, Australian Super’s high growth pre-mixed option can allocate up to 15% to Private Equity, 30% to unlisted infrastructure and 30% to unlisted property.
But investors can also achieve this through listed investments, managed funds and individual companies that own and manage infrastructure and real estate. I outline two highly-rated opportunities below.
Does this model apply to individual investors
Yes and no.
Swensen believed a new approach was needed to support the an endowment with the dual goals of generating income for annual expenditures at Yale, while maintaining capital growth for the future.
The need to support current spending needs while maintaining capital growth over the long-term looks remarkably similar to the challenge facing investors trying to fund retirement.
The issue is more with execution of the strategy.
Yale and other large institutional managers have access to managers that individual investors don’t. They also have the scale to directly purchase assets like real estate and infrastructure outright or with a couple partners.
Yet there are ways to get similar exposure using publicly traded firms.
Australian Super holds one of the largest stakes in Heathrow Airport. Auckland Airport (ASX: AIA) is a publicly traded company.
Brookfield Infrastructure (NYSE: BIP) owns ports, railroads, oil pipelines and toll roads among other assets.
Transurban (ASX: TCL) owns extensive road networks across capital cities in Australia.
And you can turn to large Super funds to have a piece of your portfolio invested in these private assets.
Yet there remains a large difference in privately holding an infrastructure asset vs investing in a similar asset through a publicly traded company. The value of privately held assets fluctuate far less frequently than a share trading on the ASX.
In down markets that means a portfolio with private assets will often hold up better than one that relies on publicly traded assets. In up markets the opposite may occur.
There is a degree of discretion involved in valuing illiquid assets. Afterall there is little to compare Heathrow Airport to in terms of similar assets and infrequent transactions to set a market price.
The concern that privately held assets are not reflective of actual market prices have caused ASIC to explore valuation practices.
This focus ignores the irrationality inherent in public markets. If Heathrow Airport were publicly traded the value would fluctuate on a minute-by-minute basis. There would be large swings in the value of the airport based on the mood of investors. Rationally this makes no sense. The value of the second busiest airport in the world would not change that rapidly or dramatically.
How to invest in real assets
Investing in real assets that are publicly traded involves a rejection of the cognitive dissonance that so often accompanies investing.
We understand the value of a long-term outlook. We nod our head when digesting Warren Buffett’s adage that you should find investments that you would be happy with if the market closed for 10 years. Yet we can’t help our pavlovian response to the fluctuation of share prices and over trade ourselves into poor investing outcomes.
In an Investing Compass episode I argued that we should focus on our personal income statements rather than our balance sheet or net worth. A focus on net worth leads to bad outcomes as we obsess over each fluctuation.
I am personally drawn to real assets in my own portfolio because it makes it clearer that each change in my brokerage balance means nothing.
Those fluctuations obscure the fact that I own long-life assets that will generate income for me in the years ahead. They often have moats because of their unique nature which will drive their value north regardless of the short-term changes in price.
Part of the reason that Dave Swensen was so interested in private assets was because he believed that there was an illiquidity premium. That means that investors are so focused on liquidity or the ability to instantaneously convert an asset to cash that they will pay more for that right and accept lower future returns.
For many of us with long-time horizons and an emergency fund as a buffer the only value from liquidity comes from our own mental hang-ups.
Discipline and long-holding periods can create your very own illiquidity premium. You will not suffer poor returns from chasing performance. You will lower transaction costs. You will defer and reduce taxes. Insulate your portfolio from unexpected events and the inevitable market downturns with cash. Find assets that will appreciate in value and protect you from inflation while generating income.
There are many things to like about using real assets to do this even if they are accessed through public markets.
Real assets bring diversification to your portfolio even if part of the benefit is covered up by short-term correlations between market movements.
Owning a portion of a port is different than owning a portion of a retailer. There are simply less things that impact their long-term value and lower overall business risk without the constant impact of competition.
2 highly-rated investment options
Both more traditional companies and real assets have a place in your portfolio.
Consider following Dave Swensen’s lead and create a portfolio that is truly diversified and long-term oriented.
You can achieve many of the benefits through listed investments, managed funds and purchasing individual companies that own and manage infrastructure and real estate.
I’ve listed two ETF options below that are rated highly by our analysts.
It might just make the difference in achieving your goals.
Some suggestions from our analysts
1. Vanguard Global Infrastructure ETF (ASX: VBLD)
Vanguard Global Infrastructure ETF (VBLD) earns a Bronze rating from our analysts and continues to earn our vote of confidence to serve investors well over the long term.
The portfolio offers diversified global infrastructure exposure at a highly competitive price.
The strategy aims to track the FTSE Developed Core Infrastructure Index for a competitive fee of 0.47% per year (0.55% and 0.49% for the hedged and index versions, respectively).
This index captures the large- and mid-cap representation of infrastructure stocks from across 20 developed markets.
FTSE defines infrastructure stocks as those having at least 65% of revenue from “core infrastructure activities," which include development, ownership, operation, and management of transport, energy, and telecommunications infrastructure.
For investors seeking an uncomplicated, low-cost, low-maintenance solution for global infrastructure exposure, Vanguard Global Infrastructure ETF presents a solid value proposition considering its price advantage, liquidity, portfolio diversification, and a track record of effective implementation.
2. Magellan Infrastructure Ccy Hdg ETF (ASX: MICH)
Magellan Infrastructure’s Silver analyst rated MICH remains a strong proposition with its first-class approach. But our dimmer view of the overall business leads to the strategy falling a notch from its highs among the cohort.
Magellan’s process is more conservative than some peers, applying a strict definition of infrastructure.
To be considered for inclusion, a company must possess an asset that is essential for the efficient functioning of society and have profits that aren’t overly affected by competition, commodity prices, or sovereign risks.
The risk-conscious attitude tends to lead to greater utilities allocations, though infrastructure allocations can rise should the view of economic conditions be bullish. We appreciate the measured approach but note this can lead to lagging in buoyant market environments.
Magellan’s approach has afforded investors considerable downside protection during market sell-offs, however.
Despite solid long-term performance, conservatism in avoiding commodity price sensitive stocks like oil and gas pipelines has resulted in softer returns short- to medium-term.
This strategy charges a 1.05% annual management fee, plus a 10% performance fee on excess returns above the higher of, the index relative hurdle (S&P Global Infrastructure Index A$ Hedged Net Total Return), and the absolute return hurdle (the yield of 10-year Australian Government Bonds), subject to a high-water mark.